Vista's Impressive Execution Continues, But The Stock Is Only Fairly Priced.

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Vista Energy, S.A.B. de C.V.'s 3Q24 results show strong production growth, but transport bottlenecks and rising costs somewhat affect its margins.Production guidance for 2025 increased to 95-100 ...

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(NYSE:VIST), one of the leading oil E&P companies from the Argentinian Vaca Muerta basin, reported 3Q24 earnings today. I have been covering Vista since October 2021, with a consistent Buy rating that I shifted to Hold only in July 2024 for a 600%+ gain. I still believe the company is the best operator in the basin, but I also think that the stock price already discounts most of the positives in the future. With a stock price that is up 4% since my July article and results fairly in line with expectations, and with the long-term plan laid out by the company a year ago, my thesis remains unchanged. I still believe the name is a Hold. Still, it is interesting to go over some operational aspects and review the valuation. Q3 2024 results Expanding production according to plan: Vista continues drilling on its main properties to close the year at an average capacity of 85 thousand barrels by Q4. The company posted an average of 72 thousand boe in Q3, 12% above Q2 figures and almost 50% above Q3 '23 figures. Oil prices are resilient: Oil prices (CL1:COM) have been elevated compared to the pre-pandemic period for three years already, and despite recession fears, they are still hovering around $70. As mentioned in previous articles, Brent's (CO1:COM) long-term (2000s onwards) average has been $75. Resilient oil prices, combined with production, have obviously translated into higher revenues and profit expansion. Lifting costs up, but not that much: The company's lifting costs ($4.7/boe) were down YoY (2%) but up compared to Q2 ($4.5) and even more against 4Q23 ($4.1). The increase is significant compared to 4Q23, but we have to consider that Argentina has inflated significantly in dollars. 4Q23 figures contemplated a US/ARS exchange rate of about 800 versus one closer to 950 by the end of Q3 (so 18% devaluation) versus inflation of 100% for 9M24. This means local costs have almost doubled in dollars, and yet the company's lifting costs are still manageable. The effect of the increase in local costs is much more evident in G&A expenses, which doubled from $15 million in 3Q23 to $30 million in 3Q24 (adding 1pp of costs). Transport is becoming a bottleneck: As mentioned in previous articles, Vista's main production bottleneck is transport to consumption (Buenos Aires) and export (Bahia Blanca). The pipelines (mainly OldelVal) are already at full capacity, and expansion projects are expected to be operating in early 2025. Still, they will only add 30 thousand barrels per day to Vista's capacity (about 50% expansion from the current 55/60 thousand). The problem is that Vista has to increase the use of trucking, which reached almost 20 thousand boe per day in 3Q24 and is expected to peak percentage-wise in Q4 but will still potentially reach 37 thousand barrels in FY25. The issue is that trucking adds $15 in costs per barrel. This is evident in Vista's transport costs (part of sales expenses), which tripled from $7 million in 3Q23 to $23 million in 3Q24. Updated long-term goals: The company raised its production guidance for 2025 when it expects to reach average production for the year of between 95 and 100 thousand boe (which would imply the end of 4Q25 at about 110/115 thousand boe). The company also expects to reach 150 thousand boe by 2030. This is about the maximum that Vista could reach on its current acreage, considering it has reserves of about 385 million barrels, and a production rate of 150 thousand per day already implies 55 million a year. Valuation Model updated: I provided two models for Vista's valuation in my July article. One is based on production costs and provides net income as a function of Brent prices. The second one provides the undiscounted value of Vista's production based on Brent prices. The only update I made was to adjust production for the average FY25 figures to 100 thousand boe per day.   Vista's two models of profitability and value of reserves as function of Brent oil prices (Author) The model is not very far away from Vista's own model because the company guided for an adjusted EBITDA of $1.5 billion at a Brent of $75. Based on the production of 100 thousand boe, the company would post D&A of about $600 million (they posted $115 million in 3Q24 extracting 72 thousand barrels per day), so their calculation of operating income is closer to $900 million, whereas mine is about $1.1 billion. Market cap and yields as a function of Brent: Vista currently has a market cap of $4.5 billion. In my opinion, a company in Argentina (a country famous for its political instability and lack of economic policy consistency) participating in a cyclical industry should provide a return of at least 15%. Based on the company's market cap and production in 2025, we need Brent oil prices to be between $70/75 (net income of $675 million) to obtain a 15% yield. This is coincidental in both models. It is true that the company can keep growing (it expects 150 thousand barrels per day by 2030), but projecting the capital structure and costs so far ahead is much more complex. If the company carried that growth at constant costs, then it would represent earnings growth of about 8.5% per year until 2030. That would mean a Brent price of $55/60 would be ok to obtain a return of 15% because the current yield would be about 7%, and the rest would come from growth. Conclusion I really like Vista; it is the best operator in the Vaca Muerta basin, it is unlevered, and it has the best exposure to oil pure-play (versus other companies more exposed to energy generation or natural gas like Pampa or YPF). The company's execution has been impressive. Yet, I believe the name's good qualities have become priced in. The name offers a sufficient yield only if assuming it can continue growing at high rates for six years into the future (a significant challenge in oil markets and in Argentina), or that Brent prices will remain elevated for a long time. The growth may be there, based on the company's execution so far, and Brent prices might remain close to $75 (it is close to the historical average). However, that would only represent a fair valuation, not an opportunity. For that reason, I believe Vista's price is fair, but I'm not inclined to buy here, and therefore consider the stock a Hold.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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